Spare Parts Pricing And Availability Showing Volatility

How much longer will young aircraft fetch higher prices for their parts than as whole airplanes?

A pair of developments is working in parallel to reshape the way the industry stocks, prices and sells commercial aircraft parts. Even as parts stocks for newer aircraft and powerplants become leaner, those same airframes are being parted out at an increasing rate. The confluence of these elements presents opportunities to save money, while continuing to maintain decent dispatch reliability.

“There's a huge transition going on in the de-stocking” of parts for AirbusA320s, Boeing 737NGs and 747-400s says Carl Glover, vice president of sales for AAR's European, Middle East and Africa supply chain operations. At the same time, parting-out has migrated from 737 classics, to older A320s, to 737-700s and, most recently, to A321s and A318s.

Both of these phenomena are impacting parts inventories that airlines carry to support these newer aircraft, making already sparse stocks even leaner and reducing the prices paid for those parts. As parting-out moves up the food chain, leaping from classic 737s and Airbuses to NGs and A321s, the industry is asking whether the phenomenon is a trend or an aberration—and just what the implications are for leaner shelves and lower parts costs.

Glover says airline shelves harbor 20% less inventory than before, and that one-fifth drop encompasses spares dedicated to newer types. He says a common practice for older aircraft has historically been to employ inventory to “displace or defer costly maintenance repair on components and engines and major [line replaceable units].” Now, that best practice has migrated to the A320 classics, 737-700s, A321s and even younger A318s. As those types are disassembled and parted out, inventories rise. Then operators use that inventory “more voraciously” in order to “reduce their direct maintenance costs.”

Such is the nexus connecting lean shelves, parting-out and lower costs.

Link those elements with equally voracious efforts at airlines to pare seat capacity and the net result is decreased spending on original equipment manufacturers' parts and components, says Glover. Instead of buying from the OEMs, he says carriers “are going out to the surplus market, or they're just consuming their own inventory better and running a leaner operation.”

An integral part of that surplus market consists of companies such as International Aircraft Associates (IAA), a major engine parts distributor. President Mitch Weinberg says carriers and engine shops are increasingly looking for parts for newer powerplants, like the CFM56-7B, “because they don't want to have [inventory] on the shelf.” They want either to dispose of components on the aftermarket, or more efficiently consume that inventory themselves. What they don't want to do is own it.

Certainly, Southwest Airlines is consuming its own inventory more efficiently these days. As of early November, the carrier ranked as the planet's largest operator of 737-700s, with 424 in the fleet. Bill Tiffany is Southwest's senior director for maintenance supply chain management. He says the parts supporting its full fleet of 737s are being winnowed meticulously, currently culling 10-15% of inventory with the ultimate aim of even deeper cuts.

What renders that possible, says Tiffany, is the size of the airline's all-Boeing fleet: 604 of its 692 aircraft are 737s. That means “we are kind of our own parts pool,” he says. “We probably have more [parts and components] than we need.” It is that situation that helped trigger efforts to pare back stocks significantly.

Tiffany says it's best to de-stock incrementally, lest “material planners . . . get a little nervous.” He says most of them have horror stories, when someone from the line or production pointed a finger at them and said, “We didn't have this part, and it's your fault.” The natural reaction is to overstock.

He believes by using measured de-stocking, carriers can build confidence among planners that the system works, that it can indeed accomplish more with less. Conceding it's a cliche, Tiffany nonetheless says, “I think it's true.”

It's also true no other airline has the breadth and depth of single-type parts stores. While Southwest may presently rely on internal economies of scale, most airlines cannot. They have to lean on more traditional parts pooling. A statement by Air New Zealand says one of its recent moves has been “to move into pooling deals, where the parts are held and provided by a supplier.”

Once predicated on ad hoc airline-to-airline pacts, parts pooling is a far more sophisticated undertaking these days, one pegged to the realization among airlines that “there's just a huge amount of . . . redundant material on shelves,” asserts David Marcontell, president and chief operating officer of TeamSAI. That overabundance resides there, he says, to assure airline executives “they they're going to have the part when they need the part.”

Over the last 5-7 years, that fear has subsided somewhat, assuaged by assurances that third-party managed parts pooling produces economies of scale without the scare. But, “There are airlines out there that are still unable to go fully lean,” says Carl Glover. “Because they've got operational demands. Or . . . because they've got the fleet dispersed over many line stations.”

Ingrained reticence to reduce stocks aside, economies of scale work to reduce inventory and cut component budgets. The price of at least some of those parts—the ones derived from cannibalizing select newer types—appears to be coming down. Marcontell says the valuation of such recently parted-out components has dropped by 10-20%.

Tiffany has yet to see evidence indicating either a bounty of 737-700 part-outs or resultant lower prices. He says, “We'll look forward to taking advantage of that” should it happen. As for that de facto internal parts pool at Southwest, he's not averse to taking the plunge into a more traditional pool. As both the network and fleet grow, “We're going to be actively looking at that.”

Parts pooling and parts de-stocking are here to stay. Industry observers are less sure about the present surge in part-outs. While agreeing that there are “more part-outs of newer equipment,” Adam Pilarski, Avitas' senior vice president, is not sure if the phenomenon is a trend or an aberration. The current crop of statistics supports the migration to newer aircraft. But the notion this is a long-term trend awaits compelling confirmation.

While there are substantial statistics as to how many commercial aircraft are being retired per se, the evidence as to how many newer aircraft are actually being parted out is largely anecdotal. Marcontell says, “We know for certain the number of retirements per year are at the highest point they've ever been.” He says in the mid-2000s, 220 to 230 airliners per year were leaving the fleet. Now it's in the 400 per year range.

Again, anecdotally, William Whelan, Avitas' senior director of technical service, envisions two to three 737-600s being parted out per year, a like number of 737-700s and a couple of 737-800s. Next year, the Avitas executive estimates perhaps five 747-400s will meet the same fate. Air New Zealand already has parted out one of its -400s according to the airline's Brigitte Ransom.

A tidal wave? No. But once again the issue is whether it presages an emerging trend, says Pilarski. He asserts we won't know until about 2014 or so. TeamSAI's take is “This is more of a temporary phenomenon, rather than a long-term change,” says Marcontell.

It is enough that this part-out migration is already affecting parts availability and prices. The phenomenon is fully entrenched in the classic A320 ranks. “At some point, there's going to be a flood of parts” on the market, asserts Marcontell. That glut could further drive down the aftermarket price for spares, perhaps beyond the current 10-20% range.

While he doesn't see 737NGs succumbing to parting-out at the same rate as older A320s, he does contend the practice will affect some of the earliest CRJ700s and -900s.

Underpinning increasing part-outs is the looming introduction of the 737 MAX and the A320NEO, to which airlines are flocking in an effort to contain fuel costs. The ability of airlines to finance new airplanes “is fairly easy” asserts Pilarski. “Financing older equipment is much more difficult.” He says the Export-Import Bank of the United States is not going to finance used airplanes, nor will the Europeans. “As a result, there's not a marketplace for used aircraft the way there used to be.” And that means many of these craft are worth more in parts than as flying machines. Pilarski cites the case of an A319 sold to a parts dealer for $14 million. The best offer from a carrier or lessor was $12 million.

ROI reigns. If an owner can realize $2 million more by parting out the airplane, no matter how young it is, that is the rational route to take, “This whole thing is being driven by economics,” says Whelan.

IAA's Weinberg sees new aircraft and powerplant parting-out as a further “driver of inventory reduction” among both engine shops and airlines. The reason is straightforward. Carriers and shops “know there's more supply out there.”

Just-in-time tends to get re-defined in such an environment, one richer in in-demand parts. “The world has become a lot more intelligent,” says Weinberg. “Every aspect of the supply chain is getting tighter and tighter.” New aircraft and engines too are subject to the laws ordering this lean new world of maintenance production, no matter when they rolled off the line.